Financial institutions looking to open new accounts with micro businesses and Generation Y customers will need to consider the next generation of online financial management solutions, according to speakers at BAI’s Retail Delivery Conference & Expo.

Micro businesses, of which there are about 22 million in the U.S., typically have less than five employees and are often run out of the owners' homes. These owners tend to mix business funds with their personal funds and run the business out of consumer accounts, making them "invisible" as businesses to financial institutions.

B. Michael Rauh Jr., executive vice president of Westerly, Rhode Island-based Washington Trust Co., says these micro businesses are mostly under-served by financial institutions. He made his comments Thursday in a session entitled “The Next Generation of Online Banking: Profiting from Untapped Markets.”

Micro businesses typically are too small to be served by most banks’ online cash management solutions, according to Rauh. Yet bank consumer online accounts do not offer enough functionality to meet the needs of these businesses, which have to use multiple systems to track and forecast their financials, create invoices, pay expenses, do payroll and prepare taxes, he says.

Many small businesses get around this problem by using either Microsoft Money or Intuit’s QuickBooks software, which they have to integrate with their banks’ online consumer services. “Banks that can do the integration for them and offer them a seamless pre-integrated program will have great appeal to these business owners, who will become stickier customers,” Rauh said.

Meanwhile, Gen Yers, people born between 1982 and 2000, are also expecting more advanced online functionality, according to Catherine Graeber, vice president and principal analyst for Cambridge, Mass.-based Forrester Research.

“Gen Yers will drive the growth of online banking services in the next five years,” Graeber said. “And of financial institution customers that currently use online services, they are the most likely to apply for financial products online.”

Generation Y customers are especially interested in software that helps them categorize their expenses and track their budgets, Graeber said. Another priority is online notices, such as over-spending alerts, she added.

“Financial institutions that want to serve Gen Yers will take advantage of the next-generation of online banking capabilities that can provide graphic displays of budgets and spending,” Graeber said.

San Francisco-based Wells Fargo & Co.’s My Spending Report is a rare example of a bank product that attempts to do this, according to Graeber. Additionally, a number of private companies provide online money management tools that are integrated with online banking platforms. A financial institution that can help with that integration will have a leg up on its competition, she said.

“Now is the time to attract this segment; it will be harder to get them to move their banking relationships later,” Graeber said. “The tools are out there. If financial institutions do not integrate the tools into their existing banking services, their customers will go to a financial institution that does or they will look outside the banking industry.”

(For more on “Invisible” Businesses, see “From Their Home to Yours: How to Reach the Home-Based Entrepreneur?” in the September/October 2005 issue of BAI’s Banking Strategies. For banking Generation Y customers, see “Winning Over Generation Y” in the October 24, 2007 issue of BAI’s Banking Strategies Retail Delivery Insights.)  

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